A gas tax may help small business

Falling fuel prices may seem like good news for entrepreneurs. But a properly designed gas tax could be even better.

(FSB Magazine) -- Like many entrepreneurs, Tedd Saunders finds most taxes annoying. He co-owns seven East Coast hotels, including the Lenox in Boston, and would love to see the estate tax gutted. He also rankles at a hotel room tax levied by lawmakers in his home state, dubbed "Taxachusetts."

Yet Saunders supports a higher tax on gasoline - even though it would raise costs for his employees who commute to work by car and might boost prices charged by his suppliers.

Says the hotelier: "We need to make tough choices to reduce our dependence on foreign oil and to recognize this looming crisis of climate change and what it will do to our lives and our businesses."

As FSB went to press, the cost of gas had plummeted 26 percent since July, to a national average of $2.21 a gallon. In the past that would have been considered good news, but the reaction today is decidedly mixed. In a recent New York Times/CBS News poll, 59 percent of respondents nationwide said they would support a gas tax if it would result in less fuel consumption and less global warming.

That helps explain why, over the past few months, pundits and politicians, including Alan Greenspan and Senator Richard Lugar (R-Indiana), have again begun pushing for some sort of gas tax. Lugar supports a tax credit for ethanol - a cleaner substitute for gasoline - that would effectively create a $45-a-barrel floor on oil.

A gasoline tax of, say, $1 a gallon may reduce consumption, but if it is not designed carefully, simply tacking an extra dollar onto the price of a gallon of gas will hammer budding businesses.

Says Bernays Barclay, a partner and the head of the U.S. energy practice at the New York City law firm Torys: "It's typically harder for small companies than for big ones to pass along to customers increases in the cost of their lighting, air conditioning and transportation, because they have a smaller base of sales over which to spread those fixed costs. As a result, they take a bigger hit to the bottom line."

Removing the guesswork

That's why a small but growing number of academics, economists and pundits recommend a different kind of tax: a floor that would kick in only when the price of gas falls below a set price - say, $3 or $4 a gallon - and whose proceeds would be returned to the taxpayer through cuts in other taxes. This approach would reduce fossil fuel consumption and imports. But it would do much more, making energy costs more predictable.

Today an entrepreneur who needs to buy a new delivery truck or boiler or air conditioner or warehouse faces a tough calculation involving lots of guesswork: Will fuel prices remain relatively high, justifying the purchase of biodiesel-fueled or hybrid vehicles, highly efficient (but expensive) heating and cooling machinery and heavy insulation? Or will they fall, making the investment in energy savings an error that pushes his costs above those of competitors?

If gas prices are guaranteed never to fall below, say, $4 a gallon and if restrictions were placed on coal and natural gas through a carbon tax or cap (effectively creating a similar price floor), business owners would know what they needed to do. (For more on carbon taxes, see the box that accompanies this story.)

And if the proceeds of higher energy levies were returned through a cut in the payroll tax, for example, entrepreneurs would have more money to invest in efficiency.

For instance, by choosing a Ford (Charts) Escape hybrid over a standard version of that SUV, a small-business owner who drives 12,000 miles a year could recoup the extra $1,218 in the sticker price (after a federal tax credit is added) in only 2½ years if a tax established a floor of $4 a gallon. If gas, however, dropped to $2 a gallon, the payback would take more than five years.

An incentive for alternative energy

Predictable fuel prices would also accelerate development of energy-saving technologies and alternatives. Many investors have stayed out of the green game even during times of high gas costs because OPEC tends to slash prices before competing technologies can be developed - as in the 1980s, when gas prices fell 31 percent, to a low of 93 cents a gallon, just as alternative solutions such as solar and synfuels began gaining momentum.

"Lenders in America are worried that the price of oil will come down again, and as a consequence it's hard to get big investments in alternative energy," says Republican Senator Pete Domenici of New Mexico. A price floor would benefit scores of entrepreneurs and the investors behind them. "Almost every great new mind has started working on alternative energy," says Vinod Khosla, a co-founder of Sun Microsystems (Charts) and former partner in Kleiner Perkins, who now heads Khosla Ventures. "Hundreds of little startups are popping up with amazing innovations."

If designed properly, a gas tax can be what economists call "revenue neutral": Every dollar collected from the gas tax could be refunded by cutting the federal payroll tax, whose flat 15.3 percent rate hits hardest at small employers and their workers.

Peter Van Doren, editor of the Cato Institute's Regulation magazine, calculates that adding a gas tax of 50 cents a gallon would generate about $68 billion a year in new federal tax revenue. A worker making $30,000 a year could see his payroll tax cut by a fifth, or roughly $434 - enough to offset the higher price of gas for the typical driver.

His employer, who pays half of the worker's payroll tax, would enjoy similar savings to help make up for his increased fuel costs. Those who cut their energy use the most would benefit most from this tax shift.

Will it happen?

A well-designed gas tax may be a good idea, but members of the Bush administration remain resolutely opposed to it. Perhaps they are wary of the idea's history. When President Carter proposed a gas tax in 1980, he received only 34 votes in the House. President Clinton proposed a broad BTU tax in the early 1990s, and he was laughed off Capitol Hill.

As Judi Greenwald, an energy and climate specialist at the Pew Center on Global Climate Change in Arlington, Va., puts it, "Just about every politician who has ever pushed for a gas tax gets kicked out of office."

The philosophical opposition to a gas tax - that market forces should determine the true price of fuel - fall apart when you consider that government spending, from the billions spent defending the flow of oil imports to the public health costs of burning fossil fuels, constitutes at least a $4-a-gallon subsidy on top of the current price, according to the International Center for Technology Assessment, a Washington, D.C., think tank.

Recently several staunch conservatives have come out in support of a tax on fuel, including Nobel laureate Gary Becker and even N. Gregory Mankiw, President Bush's former chief economist.

What's the likelihood of any kind of carbon tax getting passed? Arizona's Republican Senator John McCain is not optimistic for the near future: "Not while this President is still in power." But in two years that will change, and entrepreneurs - who are particularly vulnerable to fuel-price swings and the payroll tax - should be prepared to lead the debate.

Do you support a gas tax? Are you afraid such a tax could hurt your business? Tell us about it. To give feedback, please write to fsb_mail@timeinc.com.